Correction: Our Market Commentary was published prematurely on Thursday.
Please disregard it. Sorry For the confusion.
Stocks are back in a confirmed uptrend and continue to rally after the fiscal cliff was averted and congress decided to put the best interest of the country ahead of their petty bickering. Stocks remain perched near resistance (2012 highs) and the action is very healthy. Looking forward, one should expect resistance (50 DMA line, downward trendline, neckline of the bullish inverse head and shoulders base, and 1448- December’s high) to now become support. The next level of resistance for the major averages is 2012′s high (1474 in the S&P 500). Meanwhile, the next level of support is 1393 and then 1343. The uptrend that began on Friday, November 16, 2012- (after politicians hinted that a deal would get done for the fiscal cliff) remains intact and offers an interesting lesson for investors- stocks are closely paying attention to government officials (Recently, the Summer rally was sparked after Draghi said he will do whatever it takes to save the Euro).
Monday-Wednesday Action: Stocks Digest Large Move
Stocks fell on Monday as investors took a breath to consolidate the prior week’s strong move. A few stocks broke out of sound bases which was an encouraging sign: AMZN, LEN, IMAX, FB, RNF were among a few of the names that broke out and traded higher on Monday. The big news came from the banking sector after several high profile banks paid billions of dollars to settle their ongoing mortgage woes. Volume was light all day which was encouraging, especially after a big move.
Stocks drifted lower on Tuesday before Alcoa (AA) unofficially kicked off Q4 earnings season. Analysts believe that S&P 500 earnings will increase by 2.8% for the fourth quarter which beats Q3’s lousy number of a +0.1% gain. Economic data was thin, small business sentiment was flat in December which was the second lowest reading since March 2010. The low reading was probably due to the drama around the fiscal cliff. Our long standing clients know that we pay more attention to how stocks and the market react to the news, not just the news.
Stocks opened higher on Wednesday but closed near the middle to lower half of the range as fear spread regarding Q4 earnings season. The latest data from Thomson Reuters showed that analysts drastically reduced their estimates from where they were at the beginning of Q4. Analysts believe that earnings will only grow by +2.7% in Q4 of 2012. Elsewhere, the Mortgage Bankers Association said weekly mortgage applications rose last week after rebounding from three consecutive weeks of declines. The U.S. government auctioned $21 billion in 10 year notes at a higher than expected yield of 1.863%. The bid-to-cover was 2.83.
Thursday & Friday’s Action: Stocks Edge Higher
Before Thursday’s open, China said that exports rose which bodes well for the global economy. Meanwhile, The Bank of England (BOE) and the European Central Bank (ECB) held rates steady and reiterated their recent easy money stance. Earlier in the week, Switzerland’s Central Bank said they are going to continue printing money to stimulate their economy. This easy money stance from global central banks has been very supportive for risk assets. Separately, ECB President Mario Draghi said he expects weakness in the euro zone area to continue into 2013 but also expects a gradual recovery later in the year. Economic data was light, weekly jobless claims rose 4k to a seasonally adjusted 371k while wholesale inventories rose +0.6% to a record $498.5B in November, which beat the Street’s estimate for a gain of +0.3%. Stocks were quiet on Friday after inflation in China topped estimates which sparked fears that they may cut stimulus to curb inflation.
Market Outlook: Uptrend
From our perspective, the market is back in an uptrend which bodes well for both the market and the economy, by extension. As always, it is extremely important to be flexible in your approach and change when the facts change (Thank you Mr. Keynes). For those of you that are new to our work, on October 9, we said “the rally was under pressure” and then said the “rally was over” on Oct 19. Immediately after that note was published, stocks fell sharply and a lot of technical damage occurred. Then we put out a note on Friday, November 16, 2012 (the exact low for this move) titled, “Time For A Bounce.” Stay tuned as we will continue to keep you one step ahead of the crowd. As always, keep your losses small and never argue with the tape.